By John W. Toothman

The Nature of the Legal Services Beast

    Lawyers and their fees have never been popular and their value always suspect: “I was never ruined but twice once when I lost a lawsuit, and once when I gained one,” complained Voltaire. Telling losers from winners can be difficult thanks to the burden of legal fees on both sides and the wringer through which the legal process has put them. Even in the less adversarial realm of transactional work or uncontested matters, like drafting basic legal documents, it is not uncommon for legal expenses and complications caused by lawyers to become the focus of all attention, instead of the legal issue or deal from which the need for legal advice grew.

The practical, realistic advice for managing legal fees that follows can be implemented in virtually any situation, just by using common sense a little tenacity would not hurt either. For the most part, the menu is a la carte: Try whatever rings true, then keep whatever works.

A novice might ask, “Why not just treat outside lawyers like any other vendor?”: Pick them by competitive bidding, based on price, qualifications, and experience, then hammer out a pro-client service agreement, manage their services to make sure they meet quality expectations, and disallow any questionable fees. Those who have been down the legal path a few times may snicker at this naiveté, but the irony is that the most aggressive, effective managers of legal services seem to be coming around to this discovery, though treating lawyers as a special class has substantially delayed their journey.

One reason why treating lawyers like other vendors is hard to imagine is that lawyers have convinced many clients that lawyers are exceptions to every rule. Their legendary cantankerousness discourages clients from making the attempt to manage them. This is the flip-side of management by intimidation call it management avoided by intimidation. Many clients fear that their lawyers not only will resist management, but will actually retaliate against uppity clients by inflating their bills or throwing the case.

Another avenue a novice might be tempted to try is the Shakespearian Legal Fee Management System: “The first thing we do, let's kill all the lawyers.” Unfortunately, that option is permanently blocked for most corporations, local government agencies, and other large organizations: They must regularly employ lawyers, although they may not need as much lawyering as they have been getting. Smaller organizations and individuals may need lawyers less frequently, but there are lawyers who exploit these smaller clients for fees in the tens of thousands of dollars or more, for example to handle a divorce or manage an estate. Regardless of the client or type of legal problem, the observations and suggestions which follow will not kill any lawyers, but should save a few clients from a fate worse than death.

Components of Legal Costs

Legal costs really have two components. First, there is the cost of the result in terms of settlements or judgments, which is the part that changes hands between the parties in litigation or a business deal. Second, there is the transactional cost of the legal process to each party. This may come directly through outside counsel fees and litigation expenses or indirectly through the cost of maintaining an in- house legal department or attending to legal matters.

Managing the cost of litigation by changing results in settlements or judgments would require a change in law, like tort reform. Changing the law is a political process, so clients should not get their hopes up about saving money on legal services through substantive legal changes whatever goes around might shortly come back around, and even well-intentioned reforms can make legal fees go up, not down.

The management techniques discussed here are therefore not dependent upon political tides. They can be implemented by clients (although law firm cooperation would certainly help) wherever money is being spent on lawyers. The goal of managing legal services is to optimize results regardless of the environment to do the best one can under the circumstances.

Optimizing Legal Expenses

Managing legal costs is not simply a matter of cutting costs to the lowest possible level. This is logically equivalent to the novice's desire to kill all the lawyers rational management is never that simple. Costs can be cut by hiring cheaper in-house lawyers or outside firms, requiring firms to give arbitrary discounts, refusing to pay the legal bill, directing the firm to settle early regardless of cost, and so on. Unfortunately, cutting investments in inside or outside legal efforts randomly or too deeply may increase the net cost if the result component of the total cost begins to soar with increasing judgments or settlements.

The recognition that some amount has to be spent on legal services, otherwise the net losses would be catastrophic, is part of the sales pitch every lawyer uses to justify his or her bills, yet some lawyers are much cheaper and even more effective. In short, expenditures on legal services are not proportional to their impact on the net result only in an economist's dreams could there be a smooth curve representing the return on legal services investments. Just as cutting arbitrarily is not the answer, unlimited spending is not either. Sometimes a law firm charging too much and not doing particularly well can be motivated by financial incentives or close supervision to improve. Sometimes the firm is already doing better for other clients, but is taking this client for granted. Sometimes the problem is best solved by finding a more efficient firm or one with more expertise. Optimizing legal expenditures is three parts art for every one part science.

Integrated Legal Management

The practice of law is changing rapidly, in part because legal management is rapidly evolving, spurred by legal fee inflation through the 1980's and extraordinary cost-consciousness triggered by the 1990 recession. In-house legal departments, which have grown in fits and starts since 1980, have provided the laboratory in which legal management has been genetically engineered. There have also been critics within the profession (like me) who have looked at the emperors’ clothes more closely.

Existing legal fee management systems may be classified into one of three waves, by increasing levels of sophistication. The first wave of legal cost containment is sporadic and haphazard. Management occurs once a crisis erupts, with the primary management tool being termination of the lawyer for extraordinary bills or a terrible result. In the meantime, clients cede all control to the lawyer the client's job is to pay the bill. This is still how most clients, even major corporations and municipalities, manage legal services.

The second wave is the current state of the art for sophisticated clients. For clients who recognize their leverage, better deals can be negotiated, firms are encouraged to compete for their business, written agreements with terms fair to the client are common, and bills are examined more closely. Still though, cost and quality are often addressed independently. While the client is more aggressive, its control is thus uncoordinated. Typical, for example, is a list of billing “do’s and don’t’s” that read more like someone's pet peeves than a coordinated management plan.

The third wave of legal cost containment is dawning. Legal fees and management of legal matters are seen as a single, dynamic system that must be managed as one, rather than as a collection of individual problems to be dealt with ad hoc. Through better understanding of how lawyers work, clients will analyze their goals to create incentives for their attorneys to meet those goals, efficiently. Every phase of the lawyer-client relationship, from attorney selection to dispute resolution, will be managed, with the goal being to streamline the process and optimize performance, not just cost. Management of lawyers will take into account not only narrow client concerns, but realities of the legal system and of law firm dynamics.

Third Wave Legal Management: A Summary

Before discussing each aspect in greater detail, here is a summary of the attributes of a sophisticated legal management system:

• Managing legal expenses cannot be segregated from managing the legal work, including strategy, tactics, staffing, quality, and other non-monetary aspects of legal work that nevertheless trigger higher bills. In short, performance and cost must be managed together.
  • Outside consultants (like us) may provide or assist with integrated management.

• In-house attorneys not only manage the outside lawyers, but they may replace them by handling litigation in-house or splitting duties with outside counsel. This provides additional competitive leverage to encourage outside firms to work leanly .
  • Equally important, in-house lawyers anticipate legal risks and head them off at the source, before they become problems. Preventive law provides the best possible form of legal cost containment.
  • Even where disputes may be inevitable, in- house lawyers are creating ADR (alternative dispute resolution) options in agreements and providing realistic litigation risk assessments to encourage early resolution on reasonable terms.
  • For companies who cannot justify hiring their own in-house counsel, we provide Independent Counsel™ to give these clients someone in their corner to monitor counsel.

• Attorney Selection: Selection of firms is based entirely on merit, with cost and prior experience being factors in merit. The goal is to select particular lawyers, not an amorphous firm, with whom a long-term relationship is expected, so long as the client's own expectations are met.

• Biases favoring large firms must be overcome. Smaller, boutique firms are given serious consideration because even the largest matters can be handled by a handful of efficient, experienced attorneys (that is how matters are normally handled even in the larger firms).
  • The largely irrelevant Martindale-Hubbell style biographical information (also used by Westlaw, for example) is superseded by relevant information about actual experience, past performance, and the like.
  • Healthy competition among firms to better serve clients is promoted. Playing firms off one another just to get a discount is avoided as short-sighted.

• Alternative Billing: Hourly fees are but one of many billing alternatives.
  • Alternatives are designed to meet client goals, while rewarding efficiency and quality. They are not merely designed to obtain discounts on fees, but to manage performance as well as fees.
  • Alternatives are tested before implementation by firm and client to demonstrate feasibility and build trust.
  • The client-attorney partnership is reinforced with risk-sharing through alternative billing mechanisms.

• Billing Agreements: Client and attorney must work as a team, with billing or performance problems anticipated early and corrected, rather than dealt with after the fact. The billing agreement establishes that relationship.
  • Rather than being a list of pet peeves or do's and don'ts, the billing or retention agreement makes the client and attorney partners and creates the client-lawyer environment. The client's goals and expectations are laid out, along with standard policies and procedures to allow, for example, efficient bill examination.
  • Aside from case-specific goals or expectations, the client wants optimum performance, meaning a satisfactory result for a reasonable cost. Streamlining the legal process by taking acceptable risks is encouraged, with informed client consent.

• Bill formats are standardized, in part to facilitate bill review and in part to allow firm- to-firm comparisons.
  • Task-based and project-based formats are used.

• Out of pocket expenses passed through to the client are strictly limited to actual cost, with larger expenses controlled by a series of techniques, including direct billing to the client, prior approval requirements, and examination of underlying receipts.

• Matter Management: Matter management and bill review are integrated. Performance, staffing, quality, strategy, and tactics are monitored through bills, budgets, plans, and work product review. Problems are anticipated before fruition or dealt with quickly upon detection. ADR is, for example, built into relationships to avoid or streamline litigation where possible.
  • As individual matters arise, they are evaluated promptly for risks, options, and likely outcomes. A plan of action is formulated (and revised as necessary). A budget is built around the plan, task-by- task, then reconciled with each bill.
  • The client looks beyond the recommendations of counsel for opportunities to streamline litigation. For example, even if the lawyer claims it is “standard” to depose every potential witness, the client may decide that this is unnecessary or not worth the cost.
  • Work product, bills, and attorney-client communications are exchanged electronically, in part to allow prompter management feedback.
  • Second opinions, through consultants, secondary outside counsel, or in-house counsel, are used to verify important decisions, consider options, obtain independent analyses, and assess settlement value.
  • Post-mortems of significant cases are conducted to extract lessons and assess firm performance. For example, fee data can be extracted to improve budgeting and settlement calculus.
  • Clients maintain databases containing work product from law firms, discovery materials, and the like to be “recycled” in future cases.

• Bill Problems & Audits: Resolving billing questions becomes part of overall matter management as the two are integrated. Instead of auditing fees alone, for the purpose of discounting, there are integrated audits of performance and fees.
  • Fees are controlled through a combination of strong billing guidelines, rational alternative fee arrangements, real-time feedback on performance, streamlining of staffing, strategy, and tactics, early exploration of settlement and ADR, and so on.
  • Lower fees are not an end in themselves. The questions are instead whether the results were optimized, the performance was satisfactory, and the fees appropriate given the results, quality, and quantity of performance.

Third wave legal management integrates the lessons of the first two waves to manage legal services as a whole. Because performance, including quality, has a significant impact on fees, and vice versa, they cannot be managed separately. Moreover, arbitrary or sporadic edicts from clients, no matter how much leverage they have, may only make things worse in terms of performance, fees, or both.

Managing Outside Counsel

Each of the tools for managing outside counsel mentioned above will now be explained more fully. With larger organizations, the reasons for going to outside counsel vary, but usually include lack of internal resources (either no legal department or a busy department) or a need for specialized expertise that is not available inside. As a management strategy, many large corporations “outsource” all legal services to law firms, while others bring some or nearly all work in-house. For individuals and smaller organizations without in-house counsel, there is no alternative to using outside lawyers unless they can do without lawyers altogether.

Evaluating the Matter:

There are many tools in this management toolbox, but the first tool to use is a diagnostic tool, to accurately assess the client's legal service needs, budget constraints, and the strengths and weaknesses of its current legal service providers, whether in-house, outside, or some of both. For routine types of matters, this evaluation may occur by class of matters, e.g., employment discrimination claims may all be handled by the same procedure and sent to the same firm, yet each matter must still be evaluated individually to determine its unique risk and corresponding plan and budget.

Evaluation of a matter must include consideration of its impact on the client. Good lawyers spend time listening to their clients this is “quality” time, reasonable amounts of which should appear in a legal bill. Bad lawyers do not plan ahead, tell clients as little as possible, and ignore the client's concerns. While blind economizing on legal expenses would suggest cutting even quality time, this investment should pay major dividends once the lawyer better understands what the client wants, what resources it has, its budget constraints, its expectations, and so on.

One example of “quality time” is taking the time at the outset to assess the legal matter in the larger context: What are the risks and rewards (beyond the legal system, i.e., political, social, business, as well as legal), what are the likely costs, what will the non-monetary costs be (including drain on personnel), what is the goal of the client, what is the other side (if this is a contested matter) up to, what are the opposition's strengths and weaknesses, and would procrastinating really be good or bad?

Some lawyers stampede clients by predicting all the horrible things that can go wrong, all the worst-case scenarios. The lawyers call them “bet the company” cases with corporate clients. Yet the lawyer may simply be disclosing the worst possibilities to avoid a legal malpractice claim if one of those scenarios comes to pass. The effect on clients can be panic and a “money is no object” mentality. Money is always an object because legal fees may bring even a government agency or major corporation to its knees or create a political fiasco with a pyrrhic victory.

Once a client decides where it wants to go, the next steps are to figure out which lawyer will get it there and what level of lawyering is needed to produce optimum results. Just as too little lawyering may not be cost-effective, too much lawyering may not yield better results, despite a dramatically enhanced bill caused by over-staffing and gold-plating. “Gold-plating” refers to overly elaborate, complicated, or expensive handling of a legal project. A routine letter that becomes three hours of drafting, re-drafting, and polishing is an example. Researching and writing an internal memorandum about every legal issue, even those on which the lawyer was supposed to be an expert, is another example of expensive gold-plating. Even more wasteful are a lawyer's redundant and inefficient attempts to “discover” obvious or irrelevant information the discovery process is the primary cause of wasted fees in litigation. Some matters actually run better and cheaper with less attention.

Some of the techniques below include means for assessing quality and inducements for providing cost-effective quality, once the client decides what its goals are. Usually the objective in litigation is to win (or reach an acceptable settlement) with the optimum investment in fees. In non-litigation transactions, the objective is usually to close the deal, draft the document, or obtain the legal advice the client needs, as cheaply as reasonably possible. Again, however, investing more than the absolute minimum in the lawyer may yield a quicker result or one that is qualitatively better, though not unnecessarily so (gold-plating). Any lawyer might be able to slap together language for a new contract, but investing in a more experienced and competent lawyer is supposed to yield a contract that considers all the pitfalls and opportunities, without generating a 1,000 page opus, yet saving trouble and litigation later on.

The next several tools relate to selecting and retaining the right lawyer and budgeting.

Selecting the Right Attorney:

The most critical tool for obtaining cost- effective legal services is the first hiring the right lawyer. Hire the right lawyer one who is attentive, with experience and efficient habits and the representation should go smoothly. Hire the wrong lawyer indifferent, inexperienced, or inefficient and all the management effort in the world might get you to where the right lawyer starts.

The search is for a particular lawyer, not some amorphous “law firm.” Most matters can be handled by one experienced, competent lawyer firms make more money by adding staff. Often this extra staff is added because the primary lawyer was a bad choice, lacking necessary competence or experience. Even if extra perspectives are needed, clients may prefer to select them from outside the firm, rather than take the firm's pot luck choices. There are few aspects of law where economies of scale are even theoretically possible. Large firms are a product of marketing to client prejudices and maximizing partner compensation at the top of the billable hours pyramid, not client-driven necessity.

Even if there are immediate deadlines to be met, take the time to screen several candidates carefully and build a consensus on which is best. A client's greatest leverage is at the threshold of the relationship, when competition among law firms is in the air and the client's ability to switch firms cleanly is greatest. The problem is that one cannot predict at the threshold the lawyer's real ability to handle the matter or approximately how much it will cost without firm cooperation. When assisting clients to select a new lawyer, we generally follow several steps:

• Determine the basic qualifications that candidate lawyers must meet, including the general issues involved and the jurisdiction in which a lawyer should be licensed to handle the matter.
• Identify candidate lawyers using referral lists, word of mouth, and biographical sources, like the Martindale-Hubbell legal directory.
• Identify additional candidates through Lexis/Nexis or Westlaw searches of relevant cases or topics.
• Include any candidates suggested by clients and other sources.
• To keep larger lists manageable, informally rank candidates based on apparent expertise and qualifications.
• Contact the top two or three lawyers to perform a conflict check and determine their interest.
• Solicit additional information on experience and fees from candidate firms, including writing samples.
• Check the candidate's references and any other sources for information about experience and track record, including published decisions, judges, and clients.
• Ask the finalists to make a presentation regarding their qualifications, experience, staffing, evaluation of the matter, budget/plan, and fee arrangements.
• Select the most experienced, competent lawyer eager to have the business with a pragmatic plan and reasonable budget.
• Selection should be based on an evaluation of the qualifications of the lawyer and team that will actually be assigned. As discussed below under the subject of Staffing, watch out, for example, for the law firm that baits the client in the selection process with a well-known rainmaker (like a former politician or judge who is now a law firm partner) then switches, once the client signs up, to lawyers the client has never met.
• Negotiate a reasonable, strong retention agreement before the lawyer starts work. A client's leverage to control fees and obtain a reasonable agreement is at the threshold, or not at all.
• Get off to a strong start in managing the lawyer by staying on budget and enforcing the terms of the retention agreement. Once selected, some lawyers ignore budgets and agreements, while others test the client's vigilance.

Clients should forget whatever bias they may have in favor of hiring the “biggest, baddest firm in town.” People gravitate toward them the same way they do toward name brands in the grocery store they assume a firm must be one of the best just because it is one of the biggest or the name sounds familiar. Surprisingly enough, large firms can be incompetent or negligent, often because they take clients for granted or delegate matters too far down until something goes wrong. Not surprisingly, however, size of the firm correlates all too well with the size of its bills. In short, big, bad firms produce big bills and surprisingly bad results. Look instead for the experienced lawyer in the lean firm.

Investigate the real expertise of each lawyer and law firm carefully. Firms often claim competence to do anything, even if they have little or no experience. (We see junior lawyers with less than four years of experience claiming expertise in two or three fields, which typically means that they have researched an issue or two in each, at most.) One tip-off that the firm's actual experience is less than advertised would be its reluctance to budget its fees or provide a detailed evaluation or plan for the matter. As discussed below, experience is the best tool for creating budgets and plans. Without experience, it is no wonder a firm cannot budget or plan. With experience, the firm can at least tell how much similar matters have cost in the past, and what result that investment achieved.

Obtaining Written Retention Agreements:

By employing a written agreement, a client may gain the upper hand, legally speaking, in the relationship. The common law and ethical rules already give the client an edge over the fiduciary lawyer in terms of control, but they provide little guidance on the mechanics of the relationship or on setting fees. The client may never need that extra leverage, but without it the common law provides few certainties about legal fees, primarily the vague requirement that they be reasonable.

Even worse than the vague common law, however, is signing the lop-sided written agreements offered by many firms. Some have terms that would be unethical if not agreed to by the client, like obtaining the client's advance permission for the attorney to withdraw at any time (even the day before trial) if the bill is not paid immediately, regardless of the prejudice to the client and of whether the client's objection to the bill is well taken. The client should instead strive to create a client-friendly environment in which the firm's incentives are consistent with the client's goals, financial and otherwise, and the client is protected against abuse.

Attorney-client agreement considerations:

• The client should dictate the terms, but reasonable terms.
• The billing agreement should communicate the client's goals and expectations, both for billing and for performance. (As and when these change, however, the firm should receive updated instructions.)
• Any in-house counsel accepting terms dictated by a firm or failing to memorialize the arrangement in a signed writing is failing the client.
• The agreement places the client firmly in control, as a “benevolent dictator,” and should cover:
  • Scope of work.
  • Client expectations and goals.
  • Matter management and responsible attorney.
  • Billing arrangement (especially if an alternative to hourly fees).
    • Permitted and prohibited charges
  • Timing and format of bills.
  • Hourly rates, if applicable, including changes.
  • Staffing, including changes.
  • Communication.
  • Limits on authority, required approvals.
  • Ethical considerations, like avoiding conflicts of interest with new or existing firm clients, recognizing precisely who the client is, and keeping information confidential.
  • Resolving billing disputes, including confidential ADR.
    • Requirement that the firm retain original billing date and cooperate with bill audits.
  • Budgets & Plans.
  • Consequences of exceeding the budget.
  • Control of work product and publicity.
• Create a legal management system, not a list of pet peeves.

Planning & Budgeting:

Lawyers, especially those who are billing by the hour, have little incentive to plan ahead. Either they look no further than the tips of their own shoes and follow their “usual” path or they react to whatever the opponent does. Yet a client cannot wait until the matter is over to understand what it might cost, the risks involved, and the options. Without an evaluation of the risk of the matter, a plan for handling it, and a budget for its likely cost, the client cannot, for example, make rational judgments about whether to pursue the matter (if it is optional), whether to settle litigation, and what resources will be required to handle the matter. There are uncertainties in many legal matters, but that is no excuse for lawyers to abdicate responsibility for guiding their clients: Experienced, competent lawyers can narrow and focus uncertainty, even if they are not psychic.

A crude evaluation by the client begins even before the attorney is retained (unless an attorney is on staff or a general outside counsel is always at hand for this sort of legal issue-spotting or “triage”). Without a preliminary evaluation of the nature of the matter and its importance, the client cannot intelligently select the attorney, who should then further evaluate the matter as part of the selection and initial stages of the representation. The plan grows out of the evaluation, and the budget grows out of the plan, by assigning a price to each task in the plan.

Budgeting makes managing the lawyer easier for the client. The client need not speculate about what is reasonable once the lawyer, who is supposed to be an expert in the field, creates a road map that the map maker must then follow. Coupled with a good dose of common sense, the budget creates a sort of poor man's in-house counsel.

The budget also eases management of lawyers because they have the budget in mind as each step of the matter progresses and each bill is issued. (Reconciliation of the bills with the budget reinforces this connection.) To meet the budget, lawyers often discount fees on their own before sending the bill, without client intervention, even if they might be able to blame the excess on someone else or to point to one of the qualifications or assumptions built into the budget as an excuse.

To reinforce the importance of the budget, the retention agreement may provide that any fees over budget either will not be paid or will be deferred until the matter is over and the client able to assess whether further payments should be made. Changes to the budget must also be approved by the client.

There are two ways to avoid the tendency of lawyers to undermine budgets by inflating them. First, make budgeting part of the selection process, when firms are competing, and competitive pressure will keep estimates down. Second, analyze the budget critically for signs of fat.

There are several methods for budgeting, but they have many steps in common, most of which are easiest for the firm to implement. A client can still use the information and common sense it has to create or at least verify budgets:

• Obtain and analyze historical data from similar matters.
  • The following data is important or helpful:
    • Results (including amounts actually paid or collected, not just awarded),
    • Fees,
    • Expenses,
    • Attorneys assigned,
    • Jurisdiction/venue,
    • Judge,
    • Opponent,
    • The type of legal claims, such as breach of contract, personal injury, or the like, but broken down as finely as possible, e.g., rear-end collision, antitrust (refusal to deal), and so on,
    • The relief sought,
    • The material facts of the case, especially those that figured in the outcome,
    • The basic procedural history of the matter (e.g., five depositions, unsuccessful motion for summary judgment, twelve months from filing to trial, settled one week prior to trial date, etc.),
    • Any other material aspects, e.g., whether there were multiple plaintiffs or defendants, counterclaims, jury or bench trial, removal from state to federal court, use and value of alternative dispute resolution techniques, and so on,
    • Cost per task, if available or able to be reconstructed,
    • Any other factors the attorneys considered material to the outcome (e.g., early, focused discovery found details to support a summary judgment motion that provided additional settlement leverage), and
    • An analysis of how the matter might have been handled more cost- effectively (i.e., a post-mortem).
  • Even if this data is not available for closed matters, firms (and clients) can lay the groundwork for building this database by beginning to capture this data from this point forward with existing matters.
  • Fee data can be analyzed by traditional statistical methods, including means, standard deviations, and regression analyses. These are commonly available on any spreadsheet program.
  • External benchmarks, like fees charged in comparable matters in which the fees were published, may be hard to come by, but extremely valuable. This data helps to keep the budgeting process from becoming inbred or out of touch with the competitive environment.
    • External sources for litigation fee data might include cases in which fees were sought through fee- shifting and litigated disputes between clients and their lawyers over fees.
    • Certain fields more routinely produce published fees because of fee-shifting statutes or rules, e.g., bankruptcy, civil rights, antitrust, and so on.
    • There may also be press reports of fees charged in cases, including polls or surveys of fees. The latter have to be taken with a grain of salt since the responses may simply be a “guesstimate” of fees charged, not based on actual data.
    • External bench marking is one of the budgeting methods discussed below. As the sole method for estimating it has serious drawbacks, but it can provide independent verification for budgets developed more systematically.
    • Law firms and clients may consider conducting their own informal surveys among other clients or firms.
    • The more comparable the bench marking data is to the type of matter and plan to be budgeted, the more reliable that data may be.
• Test the budgeting system by creating internal budgets for actual matters, even if the budgets are not disclosed to the firm.
• Evaluate the matter to be budgeted carefully due diligence is crucial.
  • With open-ended hourly billing, the primary concern of counsel is signing up the client (after making sure the client can afford plenty of fees), but for a budget the lawyer must know much more about what he or she is getting into.
  • Due diligence also requires the client to better understand its expectations and goals.
  • Obtain information about likely opponents, the judge (or venue), significant substantive, procedural, and factual issues, and comparable matters handled outside the firm as well as inside.
• Create plans for the matter, including not only the most likely strategy and tactics, but likely contingencies, pitfalls, detours, and options as well.
  • The plan is the skeleton onto which the budget is attached.
  • Experienced counsel should be familiar not only with how the matter should proceed “by the book,” but common detours.
  • Hourly attorneys too often let the matter meander toward completion plans establish not only the path, but the goal.
• Attach an estimated cost to each step in the plan, with estimates or ranges for the contingencies as well.
  • Include as well internal conference time, time for communicating with the client, and other billable aspects of the matter that relate to its administration as well as to the specific, productive tasks. (Non-billable time should not be included.)
  • In addition to attorneys, fees for other approved staff members should be included, such as paralegals.
  • The ABA/ACCA Uniform Task-Based Management System: Litigation Code Set has a primitive budget format, designed by law firms. The code numbers used are from the ABA/ACCA uniform task-based billing system.
• Include in the estimate the likely out of pocket and other expenses the client may incur, including copying, experts, local counsel, litigation support, and so on.
  • These costs typically account for less than 10% of the bill, but they provide insight into the reasonableness of the plan.
• To estimate the full cost of a matter, clients must add to the budget for outside fees and expenses their own additional costs, such as their internal time and expenses for assisting outside counsel with discovery, and so on.
• For purposes of evaluating risk, and thus cost- effectiveness and settlement potential, estimate also the probability of each possible outcome or contingency.
  • Acquire data from similar matters within the firm and from outside sources to determine a range of likely outcomes.
  • Use the lawyer's experience and judgment to analyze the risks and benefits.
  • Consider using case evaluation software, which uses various decision-making models to make logical analyses of options.
  • This analysis is inherently subjective and indeterminate.
  • This analysis, coupled with the legal expense budget, provides the client with the most rational means, however, for assessing the cost-effectiveness of each option.
• Discuss the plan and budget with the lawyer, together with the likely contingencies.
  • This is best done at the threshold, as part of the selection process, but counsel may be reluctant or unable to perform full evaluations and expend the time to prepare a detailed budget for a matter they may never handle. Some sort of rough budget is needed at the threshold, even if it may have to be fleshed out early on.
  • Through their retention agreements, many clients give a deadline of 60 days for budgeting. This seems too long if the attorney is going to give prompt attention to the matter 60 days sets an awfully slow pace. Thirty days should normally be sufficient, to coincide with issuance of the first bill.
• Reconcile the budget items with corresponding items in the bills as each bill is issued.
  • Too often, the initial budget is treated by lawyers and clients as the end of the process, when it should really be the beginning.
  • Each bill should include a table or spreadsheet that compares the budgeted amount for each stage or task against the actual billed amount.
  • This provides a red flag for both lawyer and client whenever the lawyer is over budget, focusing management attention.
    • Being under budget, e.g., by procrastinating or cutting corners, may also be a bad sign.
    • Material discrepancies, e.g., over a certain dollar threshold (say $1,000) or over a certain percentage of the task budget (say 5% or 10%) should require an explanation by the lawyer, revision of the budget, and other remedial steps (such as discounting of the fee or even replacement of counsel).
  • The budget (coupled with appropriate language in the retention agreement) effectively shifts the risk of budget overruns from client to lawyer.
    • Some clients automatically refuse to pay any amounts over budget, which they detect through reconciliation, “exception,” or “variance” reports.
    • Amounts over budget may be held in suspense until the client decides, in its discretion, whether to pay (perhaps in light of the ultimate result).
    • Authority to disallow or withhold fees over budget should be provided by the retention agreement to avoid any argument that failure to pay would be grounds for the attorney to withdraw.
  • In addition to reconciling the current month's bill with the appropriate portion of the budget, year-to-date or matter-to-date totals should be presented for both actual fees billed and budgeted.
• Update the budget regularly.
  • Updates should be due at regular intervals and whenever a material event occurs, e.g., one that will change the budget by 5%, 10% or more.
  • Typical intervals are quarterly, though reconciliation of the budget with bills invites monthly scrutiny.
• At the end of each matter, fold the lessons learned from that matter into the historical data used in future budgeting processes.
  • The ability of firms to meet budgets should be considered in making future selections of outside counsel.
• Obtain and analyze historical data from similar matters.
  • The following data is important or helpful:
    • Results (including amounts actually paid or collected, not just awarded),
    • Fees,
    • Expenses,
    • Attorneys assigned,
    • Jurisdiction/venue,
    • Judge,
    • Opponent,
    • The type of legal claims, such as breach of contract, personal injury, or the like, but broken down as finely as possible, e.g., rear-end collision, antitrust (refusal to deal), and so on,
    • The relief sought,
    • The material facts of the case, especially those that figured in the outcome,
    • The basic procedural history of the matter (e.g., five depositions, unsuccessful motion for summary judgment, twelve months from filing to trial, settled one week prior to trial date, etc.),
    • Any other material aspects, e.g., whether there were multiple plaintiffs or defendants, counterclaims, jury or bench trial, removal from state to federal court, use and value of alternative dispute resolution techniques, and so on,
    • Cost per task, if available or able to be reconstructed,
    • Any other factors the attorneys considered material to the outcome (e.g., early, focused discovery found details to support a summary judgment motion that provided additional settlement leverage), and
    • An analysis of how the matter might have been handled more cost- effectively (i.e., a post-mortem).
  • Even if this data is not available for closed matters, firms (and clients) can lay the groundwork for building this database by beginning to capture this data from this point forward with existing matters.
  • Fee data can be analyzed by traditional statistical methods, including means, standard deviations, and regression analyses. These are commonly available on any spreadsheet program.
  • External benchmarks, like fees charged in comparable matters in which the fees were published, may be hard to come by, but extremely valuable. This data helps to keep the budgeting process from becoming inbred or out of touch with the competitive environment.
    • External sources for litigation fee data might include cases in which fees were sought through fee- shifting and litigated disputes between clients and their lawyers over fees.
    • Certain fields more routinely produce published fees because of fee-shifting statutes or rules, e.g., bankruptcy, civil rights, antitrust, and so on.
    • There may also be press reports of fees charged in cases, including polls or surveys of fees. The latter have to be taken with a grain of salt since the responses may simply be a “guesstimate” of fees charged, not based on actual data.
    • External bench marking is one of the budgeting methods discussed below. As the sole method for estimating it has serious drawbacks, but it can provide independent verification for budgets developed more systematically.
    • Law firms and clients may consider conducting their own informal surveys among other clients or firms.
    • The more comparable the bench marking data is to the type of matter and plan to be budgeted, the more reliable that data may be.
• Test the budgeting system by creating internal budgets for actual matters, even if the budgets are not disclosed to the firm.
• Evaluate the matter to be budgeted carefully due diligence is crucial.
  • With open-ended hourly billing, the primary concern of counsel is signing up the client (after making sure the client can afford plenty of fees), but for a budget the lawyer must know much more about what he or she is getting into.
  • Due diligence also requires the client to better understand its expectations and goals.
  • Obtain information about likely opponents, the judge (or venue), significant substantive, procedural, and factual issues, and comparable matters handled outside the firm as well as inside.
• Create plans for the matter, including not only the most likely strategy and tactics, but likely contingencies, pitfalls, detours, and options as well.
  • The plan is the skeleton onto which the budget is attached.
  • Experienced counsel should be familiar not only with how the matter should proceed “by the book,” but common detours.
  • Hourly attorneys too often let the matter meander toward completion plans establish not only the path, but the goal.
• Attach an estimated cost to each step in the plan, with estimates or ranges for the contingencies as well.
  • Include as well internal conference time, time for communicating with the client, and other billable aspects of the matter that relate to its administration as well as to the specific, productive tasks. (Non-billable time should not be included.)
  • In addition to attorneys, fees for other approved staff members should be included, such as paralegals.
  • The ABA/ACCA Uniform Task-Based Management System: Litigation Code Set has a primitive budget format, designed by law firms. The code numbers used are from the ABA/ACCA uniform task-based billing system.
• Include in the estimate the likely out of pocket and other expenses the client may incur, including copying, experts, local counsel, litigation support, and so on.
  • These costs typically account for less than 10% of the bill, but they provide insight into the reasonableness of the plan.
• To estimate the full cost of a matter, clients must add to the budget for outside fees and expenses their own additional costs, such as their internal time and expenses for assisting outside counsel with discovery, and so on.
• For purposes of evaluating risk, and thus cost- effectiveness and settlement potential, estimate also the probability of each possible outcome or contingency.
  • Acquire data from similar matters within the firm and from outside sources to determine a range of likely outcomes.
  • Use the lawyer's experience and judgment to analyze the risks and benefits.
  • Consider using case evaluation software, which uses various decision-making models to make logical analyses of options.
  • This analysis is inherently subjective and indeterminate.
  • This analysis, coupled with the legal expense budget, provides the client with the most rational means, however, for assessing the cost-effectiveness of each option.
• Discuss the plan and budget with the lawyer, together with the likely contingencies.
  • This is best done at the threshold, as part of the selection process, but counsel may be reluctant or unable to perform full evaluations and expend the time to prepare a detailed budget for a matter they may never handle. Some sort of rough budget is needed at the threshold, even if it may have to be fleshed out early on.
  • Through their retention agreements, many clients give a deadline of 60 days for budgeting. This seems too long if the attorney is going to give prompt attention to the matter 60 days sets an awfully slow pace. Thirty days should normally be sufficient, to coincide with issuance of the first bill.
• Reconcile the budget items with corresponding items in the bills as each bill is issued.
  • Too often, the initial budget is treated by lawyers and clients as the end of the process, when it should really be the beginning.
  • Each bill should include a table or spreadsheet that compares the budgeted amount for each stage or task against the actual billed amount.
  • This provides a red flag for both lawyer and client whenever the lawyer is over budget, focusing management attention.
    • Being under budget, e.g., by procrastinating or cutting corners, may also be a bad sign.
    • Material discrepancies, e.g., over a certain dollar threshold (say $1,000) or over a certain percentage of the task budget (say 5% or 10%) should require an explanation by the lawyer, revision of the budget, and other remedial steps (such as discounting of the fee or even replacement of counsel).
  • The budget (coupled with appropriate language in the retention agreement) effectively shifts the risk of budget overruns from client to lawyer.
    • Some clients automatically refuse to pay any amounts over budget, which they detect through reconciliation, “exception,” or “variance” reports.
    • Amounts over budget may be held in suspense until the client decides, in its discretion, whether to pay (perhaps in light of the ultimate result).
    • Authority to disallow or withhold fees over budget should be provided by the retention agreement to avoid any argument that failure to pay would be grounds for the attorney to withdraw.
  • In addition to reconciling the current month's bill with the appropriate portion of the budget, year-to-date or matter-to-date totals should be presented for both actual fees billed and budgeted.
• Update the budget regularly.
  • Updates should be due at regular intervals and whenever a material event occurs, e.g., one that will change the budget by 5%, 10% or more.
  • Typical intervals are quarterly, though reconciliation of the budget with bills invites monthly scrutiny.
• At the end of each matter, fold the lessons learned from that matter into the historical data used in future budgeting processes.
  • The ability of firms to meet budgets should be considered in making future selections of outside counsel.

Budget Method 1: Budgeting by Compiling Component Tasks

This is the method most commonly discussed and used by those clients and firms attempting to budget systematically this is the state of the art. In this method, the plan is crucial because each step of the action plan is broken down into the sub-tasks necessary to accomplish each task or likely to arise under various contingencies. Thus, a discrimination case becomes a collection of tasks, including investigation, research, several motions, discovery taken, discovery answered, trial preparation, settlement negotiations, and so on. A legal matter is thus a collection of interlocking building blocks. A price tag is then affixed to each sub-task, with the total of the tasks being the total budgeted cost.

This method integrates well with a task-based billing system when it comes time to reconcile budget with bill. The tasks in the bill should be the tasks in the budget. This makes the feedback from a task budget relatively immediate, whereas one may not be able to tell how the lump sum budget is doing until the last bill comes in. Task budgets are also quite flexible when detours or contingencies arise a few more depositions here, another motion there, and the old budget fits the new situation. (It is not quite that simple, because tasks are interrelated, but other budget techniques are far less flexible.)

Budget Method 2: Budgeting by Staff and Time

Lacking the data to assign estimates to each component task of a legal matter, or perhaps wishing to create a quicker, simpler estimate, some lawyers rely on a variation on Parkinson's Law to create crude estimates. Parkinson's Law states that work expands to fill the time available. Without inquiring into what tasks will be performed, what the strategy or plan will be, or what each step will cost, one can estimate cost by assuming that each timekeeper assigned to the staff will bill however many hours he or she will be assigned to the matter each month, for the duration of the matter. This method is primitive, but a lawyer familiar with a court's calendar, or the deadline for a transaction, can create a rough budget in seconds with little analysis of the underlying matter.

For example, in the U.S. District Court for the Eastern District of Virginia, known as the “Rocket Docket” because of its short life span for civil cases (six to eight months), a firm might expect to use one attorney half-time for several months, then one attorney full-time and another half-time the month of trial. If their average hourly rate is $130 per hour, the estimate would be between $100,000 and $130,000 through trial. The problem is that this budget takes into account nothing about the merits of the matter, provides no insight into how the firm will handle the matter, and frustrates intelligent management by the client. Whether the case is a securities dispute, an employment discrimination case, or a patent infringement case makes little difference. But delaying the trial by a few months, or years, causes the budget to increase proportionally, even though it would seem logical that there would be no more work necessary to prepare the same case for trial in eight months or eighteen months. Yet somehow the case expands to fill that extra time, which is the message of Parkinson's Law.

Because it depends so heavily on knowing only four variables number of staff, hourly rates, percentage commitment, and months to completion this budgeting method demonstrates the significance of controlling staffing and moving matters along, not just discounting hourly rates, to keep fees down. Unfortunately, the staff/time budget does little to facilitate integrated management for cost-effectiveness. With monthly breakdowns, the client can tell if the matter is getting off budget, but this may simply be due to the vicissitudes of litigation. Whether the budget will hold depends primarily on the prognostication abilities of the estimating attorney and external forces, like congested dockets.

This method relies on the tendencies of hourly billers to find something to do, but does not force counsel to think the matter through and develop a cost-effective strategy. The method does encourage counsel to be cost-conscious, yet the incentive is not to terminate the matter early or staff leanly. Dragging the matter out or convincing the client to add staff automatically makes more work, even if no plan exists into which that work will be integrated. This is a recipe for unfocused representation as usual.

Staffing:

Controlling legal staff is crucial to controlling legal fees. Arguing about the charge per page for photocopies or a 10% discount to hourly rates is pointless if the attorney has unlimited discretion to add billing staff to the matter. A paralegal billing at rates common in most cities can bill $15,000 in a month, an associate $30,000, and a partner $45,000 or more. And this is just the direct cost of that person's billable time. With the addition of each timekeeper, the time wasted by all the others on internal conferences increases, extra copies of many documents have to be made, and so on. And churning the staff by replacing team members who are already up to speed with new staff not only wastes time educating fresh recruits, but wastes the investment in the staff now missing in action.

Watch out for the “bait and switch routine”: Once a client goes through the selection process discussed earlier to select a legal expert, make sure that expert is handling the case and not someone else or an amorphous and ever-changing “team.” Many clients are attracted to a firm by the reputation of one partner, who makes a few guest appearances on the bill (usually to be briefed in preparation for the next performance for the client's benefit), while the guts of the matter have been delegated to others with less experience.

Firms often excuse this bait and switch by suggesting they are doing clients a favor by pushing the work down to cheaper attorneys. Unfortunately, the client is often paying for on-the- job training for the junior attorney, while the more senior attorneys then charge to correct or re-do their work. Junior attorneys two or three years out of law school billing at, for example, $125 per hour and more can bill well over $20,000 in a month none of it worthwhile. The more senior attorney, with the great reputation, should not take so long nor suffer so many false starts.

In addition to controlling the quantity of staff, clients must control the quality of staff. Aggressive clients want the firm's best and brightest on their matters oblivious clients get the leftovers. Leftovers include, for example, the junior associates who are serving apprenticeships at client expense, partners without client portfolios, senior associates who have fallen off the partnership track, temporaries, paralegals with nothing else to do, and even summer clerks. They may be very likable people, but are they cost-effective? Partners without portfolios and associates passed over for partner have the most experience, so long as their hourly rates and billing habits are reasonable. Sometimes, though, their second-class status in the law firm makes them desperate to bill as many hours as possible to redeem themselves or hold on to their jobs. Often the firm parks them wherever a client is least likely to notice, for example, where the matter is large or the client well-financed, but indifferent we call these “soaker clients” because they get soaked with legal fees.

Managing Quality Second Opinions & Post-Mortems:

At the threshold of the matter, the selection process begins with the evaluation of the whole matter, including client goals and budgets, even if the client decides that an existing firm will do and no new firm is going to be selected. If the client will be selecting a lawyer to handle the matter, each candidate’s initial evaluation should be part of the selection process. Once the matter has been assigned, that lawyer will then have a monopoly on case information and advice. But that lawyer's judgment may not be perfect, even if litigation complications or greed do not cloud that judgment. If there were only one right answer to legal questions and all attorneys were competent (on all subjects) this might not be a problem, but interpreting the same circumstances differently is the hallmark of lawyering. Why else would we need trial judges overseen by courts of appeals overseen in turn by supreme courts?

Where the question is important or expensive enough, there is no impediment to obtaining a second opinion at any stage of a matter and, at the end of each matter, a post-mortem should be performed. In essence, this is what in-house counsel should be doing when monitoring the work of outside counsel. Clients worried about unjustifiably spoiling their relationship with outside counsel by getting a second perspective can obtain a confidential second opinion as long as they have enough background information on hand to brief the second lawyer. And second opinions do not cost much it takes far less time to review a file than it takes to build it. (Insurance companies, the most savvy consumers of legal services in most instances, employ entire firms to “monitor” cases they would not do so if the overall cost were not reduced through monitoring.)

Even with complicated reviews of multi- million dollar litigation, including legal bills, it typically takes us less than a week or so per case to prepare a second opinion and costs 3% or less of the fees charged by primary counsel, including examination of their bills. Clients most often want a second opinion when their confidence in primary counsel has been shaken, but are not sure whether the problem is real or just a by-product of client anxiety. Another use for second opinions is to check the quality of work in mid-stream, while there is still time to switch firms or strategies, or at its conclusion (a legal post-mortem), especially after unexpectedly bad results. We find everything from incompetent attorneys, to undisclosed sanctions entered against counsel, to case churning, to matters doomed to fail but propped up by attorneys billing by the hour, to the efficient, competent handling of a matter by a firm that deserves to get more work from the client.

Use these techniques to manage the entire legal services package, including quality, not just the fees:

• Integrate matter management with fee management to manage the entire system, dynamically.
• Billing problems are not the only potential problems and may indicate worse problems with performance.
• Second opinions & Post-mortems: Consider getting a second perspective, from an independent lawyer, especially on key questions (e.g., settlement value, legal theories).
  • This can be kept confidential from the primary lawyer.
  • In-house counsel may effectively do this, but may sometimes be too close or lack on-point expertise.
  • Avoiding problems is far better than trying to repair them: An ounce of prevention is worth a pound of cure.
• Moving matters along toward a prompt resolution is generally best.
  • Lawyers who are reluctant to move matters along are not only more expensive, but may be procrastinating out of inexperience or incompetence.
  • But watch out for front-end loading of matters with lots of expensive experts or litigation support, for example, that may be wasted if the case is resolved early by motion or settlement.
• Settlement opportunities.
  • Most matters settle, but too late to save the majority of the fee push to settle early.
  • Inexperienced lawyers are a barrier to settlement:
    • Lack of experience translates into inaccurate assessments of likely outcomes and inaccurate budgets. The inexperienced lawyer gives the client unreasonable expectations that are hard for the client to forget.
    • Many litigators talk tough or underestimate the opposition until they reach the courthouse steps, then capitulate.
  • Lawyers have lots of excuses for delaying settlement negotiations or sabotaging them.
    • Involve the principals in negotiations to cut through the egos and get to the point.
    • Uncertainty in the legal process is a barrier, too. Judges who procrastinate in ruling, irrational jury verdicts, and guaranteed rights to appeal all encourage parties to hope for miracles or postpone the inevitable.
    • Hourly fees discourage lawyers from seeking early settlement.
• Make sure your lawyer is attentive, but not dependent.
  • Attentive lawyers appreciate your business, look for ways to save fees, return phone calls, voluntarily adjust bills, and are constantly alert to your needs.
  • Dependent lawyers need to make as much money as possible, so in an hourly billing environment they may delay and complicate matters, and, in extreme cases, pad their bills.
• Alternative fees may reduce the management burden. Instead of worrying about each hour, the client can focus on quality and results.
• Insist on regular, meaningful status reports and pre-approval of significant decisions, strategy, motions, discovery plans, scheduling, staff changes, and so on.
  • Some of this can be accomplished through the budget/plan process, with updates.
  • Give the firm feedback and discuss the client's goals and expectations.
    • Attend hearings, depositions, settlement conferences, and so on.
    • Read drafts, correspondence, and internal memoranda.
    • Talk with witnesses and local counsel.
• Manage expenditures for experts, litigation support, and so on, but hold your attorney responsible as well.
• Whether the lawyers are following TQM (Total Quality Management) principles or not, clients can insert many TQM-style concepts into the process, e.g., by giving the firm feedback, telling the lawyer when the client is not satisfied, asking to be incorporated into decision making, and so on.
  • Goals and expectations should be communicated through the retainer agreement and subsequent contact, e.g., in response to budgets and plans.

Managing Quality: Warning Signs:

In addition to managing lawyers in a generally alert and aggressive manner, there are warning signs for which clients should be alert, either at the selection threshold or as the relationship progresses:

At the Selection Threshold:

• High firm overhead. Primary expenses for firms are salaries (including partner profit divisions), office lease, and other professional and office expenses. A lean firm will always have the potential to be cheaper.
• Claims that the matter is too unpredictable to plan or budget. This is a sign of inexperience or an inability or unwillingness to be cost conscious.
• Counsel suggest that this is a “bet the company case” or that the client should assume that the matter has potential consequences far beyond the apparent value of the matter. These may be attempts to panic the client or divert attention from fees.
• Reports, i.e., legal community gossip, about changes in the health of the firm, billable hours quotas, changes in size, new office space, defections, malpractice suits or settlements, ethics reprimands or sanctions, and so on.

As the Relationship Progresses:

• Staff additions and changes in staff: Aside from the extra fees that additional staff generate, each change in staff wastes the investment in the departing staff member and adds the cost of breaking in and communicating with the new member. Frequent changes in staff indicate that the firm is taking the client for granted and indifferent to cost.
• Inattention of the primary counsel or assignment of responsibility to another, especially junior attorney, are again signs that the client is being taken for granted.
• Slow bills, which impede management, especially as to the fees still in the pipeline and yet to be billed. Slow billing may indicate that the firm recognizes the matter is costing too much or is going over budget, so the bill is delayed for presentation until there is good news in which to wrap it.
• Ignoring the retention agreement, including bill formats: Bills that do not conform to bill format requirements, or any other indication that the retention agreement or billing guidelines are being ignored, need to be addressed quickly and firmly by the client.
• Exceeding budgets by a significant amount is an obvious warning sign, which is one purpose of budgets.
• Bills include impromptu discounts or adjustments: This can be a sign of cost- consciousness, but may also indicate that even the attorney thinks fees are too high in comparison with value.
• Events that were unanticipated by counsel's plan: Often counsel blame poor results on the court, opponent, or fate too many of these surprises indicates, however, that counsel is inexperienced or incompetent.
• Sanction motions (by either side), threats by one attorney against the other, cat fights, and admonitions from the judge: These are signs counsel have gotten their egos involved.
• Lots of internal conferences, memos to the file, and other “internal” work product, but relatively little external activity with the court or opponent.
• Imbalances between fees and out-of- pocket expenses, e.g., lots of computerized research but no work product, or lots of time in conferences but low charges for copying, postage, and so on.
• Counsel cannot articulate rational reasons why particular tasks are necessary: Too many lawyers use discovery, for example, as though it were a fishing net to cast as widely as possible, spend many hours to see what it caught, then throw back all the innocent victims.
• Reluctance of counsel to schedule an early trial or to discuss settlement: In legal work other than litigation, the equivalent would be a reluctance to meet with the other side to conclude negotiations or endless rounds of tiny changes to documents (thereby postponing signing).
• Lots of “trial preparation” but no clear plan for trial or real, concrete trial preparation. In legal work other than litigation, this might be a failure to reach closure on a transaction or to complete drafting of a document.
• Chunky time entries in which the “core” team members bill chunks of time, day in and day out, even when there is little to do. For the core team, this is their main client, to whom they look to fill their billable hours quotas. Parkinson's Law flourishes in this environment.

Fees & Billing:

Now that we have covered several ways to manage matters to keep the bills low, there is always the direct approach to reducing legal fees even after the bills are issued. The 1980's produced a glut of attorneys. When the 1990 recession hit, many clients became more cost- conscious about legal fees. The result of these two events has been increased competition among lawyers for fewer premium clients, with sophisticated clients aggressively demanding more cost-effectiveness.

Clients need not be shy about negotiating with the firm over fees even after the bill has been issued. Legal fees have high profit margins and many clients are either slow to pay or never pay. It is not uncommon for firms to discount bills by 10% to 25% simply because a valued client is unhappy. As discussed in the next section, if the client identifies specific problems with a bill, like those a bill audit might find, then the percentage can go way up. (For example, my firm has seen law firms walk away from bills over $500,000 or discount bills by hundreds of thousands of dollars when faced with our report some have walked away as soon as they heard the client wanted a review.)

Promptly venting frustration with bills is important. Clients who suffer in silence are only postponing the inevitable, which sometimes leads to a much more serious explosion under more stressful circumstances, like on the courthouse steps just before “the big case” goes to trial. Prompt feedback limits the quantity of similar problems still in the billing pipeline and reduces the impact on the law firm, which is important to reaching a negotiated settlement.

An August 1994 Chicago Daily Law Bulletin story contrasts the vastly different legal management techniques of two Chicago agencies with substantial legal bills. While both obtained competitive bids from law firms, including estimates, and used written retainer agreements, one paid up to $375 per hour, the other capped rates at $145 per hour. There were many instances in which the same firms were doing the same types of work for hourly rates approximately $50 per hour cheaper for one agency than the other. The cheaper agency also used staff attorneys to handle many types of matters others sent out and used its own paralegals to assist outside counsel (rather than outside paralegals costing $50 per hour and up). Of course, there were indications of political cronyism with, e.g., one firm (whose former partner had been general counsel of the wasteful agency) charging the wasteful agency over $46,000 for the salary of the former partner's secretary. The moral of the story: Competitive bidding, budgets, and written agreements are just tools clients still have to use them well to realize their full potential.

Alternative Fees:

One way to avoid the pitfalls of hourly fees, like its emphasis on quantity over quality, is to opt for something else, like flat fees, contingent fees, monthly retainers, and so on. Hybrids of fees can be created, such as a reduced contingent fee coupled with a heavily discounted hourly rate or a monthly retainer for “basic” work, plus discounted hourly fees for the truly exceptional matters.

Alternative fees need to be tailored to the situation, to create incentives consistent with the client's goals, to insure that fees are proportional to value, to make fees predictable, and to shift part of the risk to the lawyer (who is, after all, in the best position to balance risk and reward). If it is imperative to win, use a bonus or contingent fee paying a lawyer by the hour makes him or her indifferent to results (except to keep the client happy for future work). If it is imperative to get the matter closed quickly, specify a bonus. If the objective is to keep liability down in defending cases, a bonus with discounted hourly rates can create the same incentives for a defendant that a hybrid contingent fee creates for plaintiffs. Some alternatives also reduce management headaches and surprises: with a flat fee, retainer, or contingent fee, there are no hourly bills to review and no concerns about over-staffing (indeed, the client needs to make sure the staff is competent and sufficient). If the same firm does work under several alternatives, plus hourly billing, the client also has to be sure the firm is not pushing work into the hourly pile and neglecting the work done under, for example, a retainer.

The biggest impediment to alternatives seems to be fear of the unknown, not just by law firms, but by clients. As much as clients complain about hourly fees, they are unsure what to expect with alternatives, especially the exotic ones. Yet alternatives can be tested without risk, even without the firm knowing the client is considering one. For example, a client considering a monthly retainer or fixed fees for specified tasks only has to look at past hourly bills to see what the average fee and deviations therefrom have been. Hourly fee budgets or estimates can also be used as practice fixed fees, with client and lawyer asking the question “What if that estimate had been a flat fee?” For contingent fees, just look at results, multiply them by a typical contingent fee of 33%, and compare that with the hourly fees that were paid is there enough of a cushion so that the risk is worthwhile? Once the client is comfortable, the firm can be brought in gradually, too, with a pilot program or “out” clause in the agreement so the truly unexpected disasters can be avoided.

Alternative fee considerations include:

• Structure alternative fees to provide efficient incentives for the lawyer to reach the client's goals.
• Encourage self-management and cost- effectiveness by putting some of the risk on the attorney.
• Consider:
  • Fixed or flat fees, based on the budget.
  • Contingent fees.
  • Discounted hourly rates (as a component of hybrid).
  • Bonuses.
  • Averaged fees.
  • Hybrids or combinations of two or more.
• Avoid:
  • Blended rates in which an average rate is charged for any lawyer or class of lawyers (e.g., $125/hour for all associates, $175/hour for all partners), especially without budgets and staff controls.
  • “Discounts” alone, either as a discount to hourly rates or on the final bill, especially without budgets and staff controls.
  • Hourly billing up to a cap, especially without budgets and staff controls.
• Alternatives can reduce the management burden.
• Alternatives can be tested without risk, then implemented gradually or with protection against windfalls or disasters.

Solving Billing Problems:

Even the most carefully crafted fee arrangement is bound to encounter a few bumps upon implementation. Keeping track of the status of the matter requires one to keep track of bills, not just for purposes of watching cost, but also to watch the progress of the matter, staffing, and the occasional sign of trouble. Hourly detail bills are a window into the workings of the firm, if you know what to look for:

• Insist on prompt, detailed, rational bills.
• Quantity of billing detail is not the point. Don't let the law firm snow the client under with a confusing format designed to give the appearance of quantity without any ability to understand it.
• Task- or project-based bills aid review and management.
• Back-up for expenses and hours should be available on demand.
• Bills should be reconciled with budgets and deviations should be explained. Amounts over budget may be held for later consideration or simply not paid.
• Give prompt feed-back. Problems do not resolve themselves. Firms tend to be more flexible when the amount in dispute is still small, but wait a few months and they may treat a client's silence as acceptance.
• Be sure that quality and value of the services to the client are commensurate with the amount billed.
  • Performance or quality analysis must be integrated with bill review.

Legal Bill Reviews & Audits:

One way to monitor legal bills, either routinely or in special situations, is through bill audits or examinations. These rarely are full- blown financial audits, like accountants would perform with financial data for one thing adequate financial data is rarely available except as to the expenses, which are a small part of the bill in most instances. Instead, this review is closer to what accountants call a performance or operational audit, which considers more subjective issues, usually economy, efficiency, and cost-effectiveness. We also examine competence, quality and performance.

As long as the client has billing details and some background information (usually work product), a limited review can be undertaken without the knowledge or cooperation of the law firm. Many clients like the confidential review because, unless they can confirm that there is something very wrong that is worth confronting the law firm about, they would rather not jeopardize the relationship. Routine suggestions generated by a bill review can be implemented by incorporating the reviewer's suggestions into the client's usual feedback to the firm.

This system of “trust through verification” is used by many large consumers of legal services, including insurance companies:

• Legal bill audits are one of the strongest tools in the management toolbox:
  • Unfortunately they are too often treated as a weapon of last resort rather than a management tool.
  • Unless conducted confidentially or handled carefully, audits may disrupt the attorney-client relationship.
  • They have less relevance with alternative fees that depend less on billable hours.
• The audit or review can be tailored to the circumstances.
  • Work product review is an integral part of serious bill review, but many auditors are not qualified to review work product, performance, quality, competence, strategy, tactics, or management.
  • The review may occur without the cooperation or knowledge of the law firm. (A true audit, which is rarely needed, requires access to firm information.)
• Lay a foundation for audits in the billing agreement by requiring the firm to save data and to cooperate.
• Computerized, task-based bills can automate the first level of bill reviewing/auditing, but computers only scratch the surface.
• Bill reviews can also be used to challenge or reduce the fees sought in litigation by opponents seeking to shift their fees to the losing party. Overworked judges appreciate the assistance of bill reviewers who examine bills for a living and have personalized tools the judges lack.

Further Information

• ABA/ACCA, Uniform Task-Based Management System: Litigation Code Set (ABA 1995). A copy can be ordered from ABA Member Services for $12.50 (non- members) or $10 (members) by calling 312/988-5522 and asking for Product Code # 5310129. The ABA/ACCA system has flaws, but, by providing a standardized format sponsored by the ABA, it is a step in the right direction.
• Legal Fees: Law & Management by John Toothman is scheduled to be published in the near future. The book will expand upon many of the ideas in this Report and include useful forms and checklists.

Further assistance is also available through The Devil's Advocate.

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